Yellen Advocates for Rare and Transparent Currency Interventions

U.S. Treasury Secretary Janet Yellen emphasized that currency interventions should be infrequent and well-communicated, ensuring that officials provide ample notice when they do occur.

Speaking at the G-7 meeting in the picturesque Italian lakeside resort of Stresa, Yellen, a former Federal Reserve Chair, reiterated the stance she helped establish in 2017 regarding exchange rates. Addressing questions on how countries like Japan might manage the strong U.S. dollar, she stated, “Intervention should be rare, pre-announced, and primarily in response to market volatility. It is not a tool to be used routinely.”

Currency Intervention and Market Stability

Yellen’s comments come as the G-7 finance ministers convene to discuss various economic issues, although exchange rates are not expected to be a primary focus. However, the impact of differing monetary policies is significant, especially as the Federal Reserve seems poised to maintain higher borrowing costs for longer than previously anticipated. Recently, the Bank of Japan is suspected to have intervened after the yen fell to a 34-year low.

Unless there is a renewed discussion on this topic, the G-7 is likely to reiterate their 2017 commitment to market-determined exchange rates and close consultation on currency matters in their upcoming communiqué.

Market-Based Exchange Rates

Yellen underscored the U.S. administration’s belief in market-based exchange rates for major economies, highlighting that exchange rate movements typically reflect fundamental economic differences between countries. “The Biden administration supports the view that large market economies should have exchange rates determined by the market. Movements in exchange rates largely reflect differences in economic fundamentals,” she explained.

She also linked the strength of the U.S. dollar to market perceptions of interest rate trajectories. “The strong dollar partly reflects interest-rate differentials and market views on the likely paths of interest rates in different economies,” Yellen noted.